DIT

I moved to the U.S./Arizona in 2005 and have lived here ever since. Saturday was my first day at the Grand Canyon! I spent the day at the Grand Canyon and didn’t have much time for research. I’d post pictures, but my phone camera didn’t do it justice.

I’m still working on due diligence on $PFIN and $RCII, also adding another one – Amcon Distribution $DIT. This one will fall under the Consumer Defensive section of my portfolio that is currently non-existent. Because the majority of investors associate volatility with risk, Cheap stocks in defensive industries with stable revenues, stable cash flows, AND low valuation multiples are usually a dime in a dozen. Amcon fits that bill. The company is paying off debt and from what I’ve seen so far, recently started repurchasing shares. It’s also another profitable asset play. Current Assets + Land/Buildings >= Market Value of Equity. So, this one is now last on my DD list. I also like what I’m seeing so far on P&F Industries – if this continues to hold true, I should have a post up hopefully by Wednesday.

Skullcandy Update

The company needs a new management team. The new CEO has had 3 years and all I see is excuses. Earnings calls are always overly optimistic “we’re seeing great customer adaptation in xyz” etc, but the concomitant financials consistently say otherwise. Competition is eating their lunch and gross margins continue to fall. The industry is transitioning to wireless headphones, and the company’s wireless products deliver lower margins than its wired counterpart. Skull Candy and Bose are the only brands I use. I own skull candy wired earphones and they are the longest lasting earphones I’ve ever had. I’ve only have to replace them when I lose them.

Part of the problem is management’s execution – The company went promotional on its inventory in Q4 of 2015 but then ran out of the wireless earphones in Q1. If the company was under-stocked in Q1, then why didn’t they increase the average price of those wireless headphones to support the gross margins? Gross margins fell 330 bps in Q1. The company also plans to spend more on marketing to promote the brand, which means lower operating margins for the foreseeable future. Headphones are not seasonal in the same sense that apparel retail is. Consumers buy heavier apparel (Jackets etc) in the Winter and lighter apparel in the Summer. So, while an apparel retailer might need 4 quarters to clear excess inventories, a headphone company should only need one.

I read through the last few years of earnings call transcripts and it’s been one excuse after another, then they blamed China for the most recent one. Declining gross margins have been because of competition. Since the wireless counterpart exhibits lower margins, it makes it just that much more difficult to value the company since I don’t know how much lower it will be going forward. I also don’t have access to IBIS world or a Bloomberg terminal or any other professional platform, so industry research is just that much more difficult. The current valuation proves that investors have lost confidence in management’s word.

Given that the company is now well prepared for China’s slowdown, Q4 of this year and Q1 of next year will likely not be as rough as the previous year’s counterparts. But given that the wireless portion of the business is quickly growing and the wired counterpart is declining, and the wireless exhibits lower margins than the wired counterpart, what seems obvious is that margins are just going to keep falling. The company also expects higher SG&A expenses, I just can’t see the light at the end of the tunnel for this one.

The company could be a prime target for a LBO transaction. It fits the bill – obscenely low valuation, founder is dumping the stock and there isn’t another shareholder with a large enough ownership to make a dent in a proxy fight. But buying solely on the hopes of a PE buy-out also fits the bill of the greater fool theory – I’m taking a pass on this one.

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Skull Candy $SKUL, Rent-A-Center $RCII, P&F Industries $PFIN, – These are three companies I’m doing some DD on and should have at least one post up by Monday night if any of them pass the test. $RCII is a more diversified Pier 1 Imports, so I will likely trim $PIR if I do purchase this. SKUL is a Graham type net-net trading below its NCAV. Per management’s guidance, will trade at 15x earnings, but with Liquid Book (current assets – total liabilities) eclipsing the stock price, the market is paying us to take the company. The company faces some headwinds which I’ll get into in a full post if it gets there. P&F is also an asset play that’s still profitable.

Though I’ve been a bit MIA lately, I spend most of my free time running through hundreds of stocks via different screens trying to find value. There’s not much on sale in this market, so I’ll run a concentrated portfolio on the few I find – I’m very much still active.